Heterogeneous Firms, ‘Profit Shifting’ FDI and International Tax Competition

Krautheim, Sebastian and Schmidt-Eisenlohr, Tim (2011) Heterogeneous Firms, ‘Profit Shifting’ FDI and International Tax Competition. Journal of Public Economics, 95 (1-2). pp. 122-133.


Larger firms are more likely to use tax haven operations to exploit international tax differences. We study tax competition between a large country and a tax haven. In the large country, heterogeneous firms operate under monopolistic competition and can choose to shift profits abroad. We show that a higher degree of firm heterogeneity (a mean-preserving spread of the cost distribution) increases the degree of tax competition, i.e. it decreases the equilibrium tax rate of the large country, leads to higher outflows of its tax base and thus decreases its equilibrium tax revenues. Similar effects hold for a higher substitutability across varieties.

Item Type: Article
Keywords: Heterogeneous firms; Tax competition; Profit shifting; Tax havens
Subject(s): Taxation
Centre: Oxford University Centre for Business Taxation
Date Deposited: 21 Jan 2011 15:15
Last Modified: 23 Oct 2015 14:05
URI: http://eureka.sbs.ox.ac.uk/id/eprint/589

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